One of my finance professors in graduate school - an investment luminary in his own right – used to say that the key to building a strong financial portfolio lies in the trifecta of team, strategy and implementation. In other words, composing an effective, balanced portfolio requires the perfect team of advisers, strategic savvy and the appropriate tools to monitor investment performance over time. Besides the trifecta, I think it is important to periodically adjust your personal portfolio if the performance does not fit your investment profile or when economic events cause underlying investments to lose money.
Pick a Team of Winners
To build a strong investment portfolio, pick a team of winners. Select a group of advisers that is diverse not only professionally but also socially. The main goal is to pick the brains of specialists versed in areas as varied as accounting, finance, banking, investment regulation, estate planning, taxation and financial planning. Professionals who fit these criteria include accountants, financial planners and advisers, enrolled agents, laws and estate planners.
To build your group of counselors, reach out to people you know and who work in the specific fields I just mentioned. Talk to your banker and ask him or her to recommend reputable professionals in your residence area. Tap into your own professional network or family ties to figure out who best can fit the profile. I am sure you know someone who knows someone who knows someone who is a lawyer, accountant, banker or financial adviser. You also can contact your state's Department of Financial Services to get a list of well-regarded investment professionals in your area.
Devise an Investment Strategy
You forge a strategy for everyday mundane activities, such as shopping for groceries or clothing, planning your day, picking up the kids after school, and coordinating a mishmash of other activities you must do to make your day a success. That is the key word: success. You need to have a similar, strategic approach to building your portfolio.
To build a successful and solid financial portfolio, you need a investment strategy, that is, a road map that talks about what you want, how you intend to achieve it and the parameters within which you want to accomplish it. Specifically, your investment strategy must lay out in detail things like your goals, risk criteria, fund allocation, and conditions for buy and sell decisions. For example, your strategy could be:
- Allocate 40% of my portfolio to bonds and 60% to stocks
- Don't put more than 5% of the portfolio value in a single company and more than 20% exposure in a single industry
- Sell my holdings in a specific company if its share's price drops more than 75% within one year after purchase
- Buy the shares of any company that has made money in the last five years and has invested significantly in renewable energy.
Here I'm just giving you a gist of what to expect in an investment strategy document. Talk to your financial adviser to get more information about what a comprehensive, professionally written investment outline looks like.
After devising your investment strategy, now is the time to turn the dream, the vision, into reality. You don't have to do it yourself if everything about finance and math and the economy is not your strong suit. Talk to your advisers – remember the team of winners? – to figure out the best way to implement the strategy. When it comes to asset allocation – financial lingo for putting your money to good use – an investment manager can help you pick specific products, depending on your risk profile and overall strategy. For example, if you want to allocate 40% of your portfolio to bonds, the manager will work with you to determine what types of bonds you want, the various maturities and the applicable ratings. So you could pick bonds of companies that:
- Are rated investment-grade, the highest rating available
- Pay interest twice a year
- Have an annual coupon (interest) rate above 3%,
- Have posted net income above $500 million in each of the preceding five years, and
- Have bonds maturing in five years.
- Track Portfolio Performance
Account tracking is integral to building a solid investment portfolio in the long term. You don't have to manage your personal portfolio on a daily basis unless you are a day trader or overly concerned with the ups and downs of the economy and financial markets. Even if that were the case, I still think you shouldn't put a surveillance camera on your portfolio holdings to detect minute fluctuations, second by second or minute by minute. That is not the goal here; an investment portfolio is something you establish with a long-term perspective.
You can review your portfolio every quarter or six months, although I know a well-regarded portfolio manager who suggests that you perform a yearly assessment to have peace of mind – and avoid the emotional toll that a constant analysis of your portfolio might cause.
Adjust Portfolio Components – If Needed
I rarely adjust my own personal portfolio because I typically spend an inordinate number of days, even weeks, when researching a company and checking its financials before buying stock. So, once I'm in, I'm in. There are times, though, when you may need to adjust your investment portfolio by selling some stocks and buying others. I suggest that you sell only if there are excruciating circumstances surrounding a company and you think it might file for bankruptcy soon or seek a temporary-default status.
There are tax implications if you liquidate, or sell, an investment asset, and this is why I avoid that alternative. You also can "double down" on a promising company whose stock you already own by reinvesting the dividends – which is always a good idea – or purchasing additional shares.
Given the vagaries of today's economy, building a strong personal portfolio is an effective way to assure a brighter future for yourself and your loved ones. To make the exercise a success, surround yourself with financial and investment experts, set and implement a winning strategy, check it every now and then, and adjust your portfolio's holdings if needed.